Is Ethical Capitalism Possible?

There is a meme, particularly fashionable since, oh, 1995 or so, that it is impossible to be both ethical and a practicing capitalist. This idea has become even more popular since the corporate scandals of the past few years. As an entrepreneur, CEO, and (I believe) and ethical person, I argue that it is not only possible for a company or businessperson to behave ethically, it is imperative. This is the first of a series of essays in which I will lay out what it means to be ethical in business, and how to behave ethically.

There are really two reasons typically given that ethical capitalism is impossible. First, that the corporation (and any similar legal structure) has no inherent ethical compass; and second, that the profit motive prevents people from behaving ethically.

Corporations Have No Ethical Compass

The argument that corporations inherently have no ethics is based on the idea that it is easier for one person to misbehave when he can cast the blame on a group he belongs to, rather than when he must bear full responsibility for his actions. This is clearly true, and is one of the things which allows mobs of people to do things which no individual in the group would normally do.

Corporations (and similar legal structures like partnerships, LLC's, etc.) are essentially groups of people, gathered together for a common purpose. But the dynamics of most corporations are much different than those of a rioting mob or a group like the KKK. Perhaps most importantly, business do hold individual employees accountable for their actions. In many companies, this is a formalized review process, but even when no formal process is in place, employees are expected to behave in a manner consistent with what the company expects.

The real question is, what kind of behavior does the company expect from its employees? Does it expect employees to behave in a way consistent with core values; or is lying, cheating, and stealing acceptable as long as employees bring in revenue? When an employee steps over the line of acceptable behavior, any of a range of things typically happen, from a mild correction by a peer, all the way to a formal reprimand or even firing.

A corporation's values come from its leadership, and are institutionalized by longtime employees. People within the company notice what kinds of behavior are tolerated by management, what gets people into trouble, what gets someone promoted, and what gets someone fired. Rather than saying that corporations have no ethical compass, it is more correct to say that corporations magnify the ethics of their leaders. The corporation as a whole will care about those things which its leadership cares about, and encourage the behavior its leaders encourage. As a result, unethical behavior by corporations is not inherent in the corporate structure, but the result of leadership which doesn't care about ethics.

The Profit Motive Prevents Ethical Behavior

But why should leaders care about ethics, when it is so much easier to make a buck by being unethical?

It is true that there are a number of shortcuts one can take in business which are both unethical and more profitable than doing things right, but these shortcuts tend to hurt in the long run. The reason is that a company does not exist in an ethical vacuum: it must be responsive to the concerns of its customers, employees, and community--however broadly those groups are defined.

A company which behaves in ways inconsistent with the values of its customers, employees, or community will find itself being corrected in any number of ways, ranging from losing individual customers or employees, to formal boycotts, to legal action. Trying to increase profitability by ignoring ethical concerns will eventually wind up costing the company money, negating any short-term benefit.

This is particularly true today, when information can spread rapidly through the Internet, and both customers and employees have an enormous range of options. It is difficult to try to sell a new car for $2,000 over the sticker price when the customer knows both the sticker price, the invoice price, and has two other offers from different dealers. The customer will decide what an acceptable level of profit is, and the dealer has to work to justify its margins.

Sometimes, behaving ethically may require a company to take a longer view, and sacrifice some profit today for the sake of building goodwill and a strong reputation. This, however, is entirely consistent with capitalism. Capitalism means working to make a profit; it does not require sacrificing all else for the maximum possible profit at every moment in time. Investing in goodwill for the future (after your unethical competitors have disappeared) is a completely rational business strategy.

Or, stated another way, nobody worries about competing against Enron anymore.

Ethical Capitalism Is Possible

Neither of the two arguments against ethical capitalism hold up under scrutiny. It is possible to behave ethically, while working to earn a profit in a corporate structure. In fact, ethical behavior makes sense as a business strategy, since it tends to create goodwill among customers, employees, and the community.

The next question is, what exactly does it mean for a business to be ethical ? What are the ethical responsibilities of a company?